Amendments to SFDR and their impact on asset managers

1. Changes to Principal Adverse Impact (PAI) indicators: The amendments introduced three new mandatory PAI indicators that focus on social aspects like human rights and labor standards, as well as several optional indicators. Moreover, the ESAs have made comprehensive changes to the existing social and environmental indicators, including revision to definitions, methodologies, and presentation, to enhance their scope and effectiveness. The following are a few examples of amendments to social indicators:

• Addition of new indicators – 'Employees earning less than an adequate wage' and 'Exposure to companies active in the cultivation and production of tobacco'
• Removal of the 'Interference in the formation of trade unions' indicator from the list of mandatory indicators; it has been renamed to 'Low coverage of collective bargaining agreements, and added to the list of opt-in indicators'
• Change of wording of the 'Rate of recordable work-related injuries' indicator from injuries to accidents, to align it with current European Sustainability Reporting Standards (ESRS) terminology
• Rephrasing the 'Breakdown of energy consumption by type of non-renewable sources of energy' indicator to 'the share of non-renewable energy consumption and production'

2. Amendments to PAI framework: The RTS document has been updated to reflect the following changes:

• Revisions to PAI indicators, including new formulae, clarifications, and technical changes
• Mandate for asset managers to consider the adverse impacts of investee companies' value chains when reporting PAI data (only if the companies themselves report on these aspects)

3. Stringent reporting on greenhouse gas (GHG) emissions: More stringent two-tiered disclosure requirement, based on accurate and detailed data collection, for funds with GHG emissions reduction targets to ensure transparency for investors.

Tier 1

• Simplified summaries: Fund managers to provide pre-contractual documents and periodic reports to offer easily digestible info on
  • Target outcomes: What the product aims to achieve (e.g., environmental impact reduction)
  • Target ambition: How ambitious the goals are (e.g., alignment with 1.5°C warming limit)
  • Strategy effectiveness: How the investment approach contributes to achieving the goals
• Periodic reporting: Asset managers to provide periodic reports that offer concise updates on progress, investment strategy's impact, and potential adjustments needed to achieve targets

Tier 2

• Detailed information: Asset managers to provide a dedicated website with in-depth information and include cross-references to the website in pre-contractual and periodic reports

While the draft RTS offers flexibility on climate target approach to asset managers, it requires them to take concrete action to meet the mandated financed GHG emissions targets. The amendments mandate that asset managers have to outline their approach for the reduction of financed GHG emissions, which can be either via the divestment of high-emission assets, engagement with investee companies, portfolio reallocation, or investment in projects with emissions-reduction potential. The draft RTS also mandates that asset managers set product-level GHG targets, in alignment with the Corporate Sustainability Reporting Directive (CSRD), to reflect gross emissions within their investment portfolios.

4. DNSH test clarification: Asset managers to document methodologies and thresholds associated with PAI indicators on their websites and demonstrate the alignment of their sustainable investments with the Do No Significant Harm (DNSH) principle. The amendments aim to address the need for a more nuanced approach to the DNSH, which is aimed at aligning investments with the EU taxonomy.

5. Template simplification: The ESAs have reorganized the language and information structure of the financial product templates to eliminate redundancy and enhance clarity. A few changes are highlighted below

• Key info dashboard: Asset managers to ensure that the first page of their dedicated dashboard highlights key details for easy access. Furthermore, the dashboard design should draw attention to crucial details, guide users, and reduce information overload. Detailed analyses to remain easily accessible within a document for sophisticated investors
• Visual cues: Asset managers to implement easy-to-understand icons to indicate product nature (sustainable investments, alignment with EU taxonomy, PAI considerations, GHG emission-reduction targets, etc.)
• Interactive access: Electronic disclosures to offer clickable links to dashboards that provide seamless access to detailed information

6. Disclosures for financial products with investment options: The updated SFDR Delegated Regulation recognizes the unique considerations of financial products with various investment choices. It includes specific provisions for pension products, which offer diverse choices such as the pan-European pension product. A few changes are highlighted below:

• Pre-contractual disclosures: Products to include a dashboard that highlights the key sustainability info on each investment option that promotes or has a sustainable investment objective
• Periodic disclosures: Asset managers to provide periodic disclosures after cross-referencing to the existing SFDR disclosures (e.g., website info) when a financial product offers many different investment choices
• Website disclosures: Products promoting or having sustainable features or objectives to have a dashboard that summarizes relevant sustainability-related information for each product. Asset managers to provide additional details for each investment option and make them potentially accessible through cross-referencing

The amendments mandate that all underlying options, regardless of their individual SFDR classification (standalone product or not), must disclose their respective financial product templates. The wording within these templates should be adapted to accurately reflect the investment option instead of the product to ensure clarity.

7. Other technical changes

• Calculation of sustainable investments of financial products: Financial products can choose between two methods for the calculation of their proportion of sustainable investments
  • Economic activity level: Economic activities contributing to specific objectives
  • Investment level: Focuses on entire companies directly invested in

Both methods consider the market value of investments as the denominator. Product disclosures must clarify the chosen calculation method.

• Machine readability: Disclosures to be machine-readable (e.g., Inline XBRL) to facilitate analysis, comparison, and accessibility; this move aligns with future European Single Access Point requirements and sustainability reporting directives

For a deeper understanding of the impact of SFDR on asset managers, refer to The Impact of SFDR on Asset Managers: A Comprehensive Guide to Sustainable Finance Disclosure Regulation